29 July 2022

Banks not cancelling direct debits

Cancelling a direct debit should be straightforward, says Banking Ombudsman.

In the past six months the Banking Ombudsman, Nicola Sladden, has received a dozen complaints about banks not cancelling direct debits.

In one case, a customer cancelled their gym membership, but the gym failed to cancel the direct debit and kept taking money from her account. When the customer contacted her bank to stop the direct debit, it said it couldn’t help.

This left the customer between a rock and a hard place because she couldn’t get in touch with anyone at the gym, and the bank said there was nothing it could do.

Once she got the Ombudsman involved, the bank promptly refunded the customer the amount they had overpaid and paid compensation to reflect the inconvenience.

While banks typically ask a customer to tell a business they’re cancelling a direct debit with them first, you don’t have to.

“Customers do not have to do this before banks can act on their instructions to cancel the authority,” Sladden said.

With the cost of living rising and more people missing repayments, it is vital banks give customers accurate and complete information about how they can manage their payment obligations, Sladden said.

The debt spiral

Cancelling direct debits can help people manage their finances if there’s not enough money to go round.

Charlotte Whitaker is a financial mentor at Dunedin Budget Advisory Service. She’s been battling banks to cancel direct debits for a long time – so much so that she tells her clients to mention the Banking Ombudsman to ensure the bank cancels the direct debit.

“While this works every time, it’s not something financial mentors should have to teach our clients,” she said.

Although sorting out direct debits is a hassle for some, for people in financial hardship the temporary loss of funds has a big knock-on effect.

If a bank doesn’t cancel a direct debit when a customer asks, it can set off a debt spiral, said Jake Lilley from FinCap, the umbrella organisation for 200 financial mentors throughout Aotearoa.

“When your account hits zero and you dishonour a payment, there’s usually a fee involved,” he said.

It could also mean there’s not enough funds for the power bill, which could incur a late fee, on top of the bank’s fee, which will impact your ability to pay for other essential services.

“It quickly becomes a problem, particularly if you’re on the jobseeker benefit … it’s going to take a very, very long time to recover from that.”

Direct debit facts

You can ask your bank to cancel a direct debit at any time.

The bank must follow your instructions to cancel a direct debit. It will also advise you to contact the business.

If you cancel a direct debit with a business and you’re still using its services, it will still expect payment. Cancelling the direct debit doesn’t cancel your contract with the business – just the method of payment.

If your bank fails to cancel a direct debit and you suffer financial loss as a result, you may be entitled to compensation. This could include a refund for overdraft fees or penalty interest resulting from the unauthorised direct debits.

A direct debit is different from an automatic payment. Direct debits give another party permission to take payments from your bank account. With automatic payments, you’ve arranged for a specific amount to be paid from your bank account to someone else’s.

If you’ve set up a recurring payment on your credit card (which operates very similarly to a direct debit) be aware that the payment can only be cancelled with the merchant. If your credit card expires, it won’t necessarily remove the recurring payment – you may still be charged.

If you’re not happy with how your bank has handled your direct debit, or any other banking matter, you can complain to the Banking Ombudsman Scheme (bankomb.org.nz)

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